South Korea implements new rules to safeguard crypto users against exchange failures

Starting next month, cryptocurrency investors in South Korea can expect increased protections following the government’s approval of new regulations aimed at enhancing user security in the event of a crypto exchange bankruptcy.

The Financial Services Commission (FSC) announced on Tuesday that the enforcement decree, set to take effect on July 19, is part of a broader initiative to regulate the country’s digital asset market.

The decree requires Virtual Asset Service Providers (VASPs) to segregate customer deposits from their operational funds, ensuring these are held at reputable financial institutions.

Through the measure, South Korea aims to reduce the risks associated with potential exchange insolvencies, thereby boosting user trust in the Korean cryptocurrency market.

Further safeguards include the requirement for VASPs to store at least 80% of users’ digital assets in cold storage—offline systems known for their heightened security against hacks and losses.

Depending on the security outlook of a VASP, regulators may impose an even higher cold storage requirement to mitigate risks of fraudulent activities or operational closure.

In addition to enhancing user safety, the decree introduces stringent penalties for manipulative and fraudulent practices within the crypto market.

Offenders involved in exploiting the system could face a minimum of one year in prison or fines amounting to five times the illegal profits gained from their activities.

The decree also includes provisions for VASPs to restrict user deposits and withdrawals under certain conditions, offering further control over irregular activities.

Recently, South Korea has been stepping up legal actions against fraudsters who dupe crypto investors out of their funds.

On May 21, South Korean police arrested 19 members of a fraudulent social media chat group, which had deceived over 300 investors into parting with nearly $19 million.

Although South Korea has not yet implemented official taxation on crypto profits, ongoing indecision regarding the introduction of such levies has led to uncertainty.

Nevertheless, tax authorities are actively monitoring the situation amid concerns that cryptocurrencies are being used to evade taxes.

On Feb. 22, crypto.news reported that a South Korean province had successfully recovered $4.6 million worth of crypto in a year from 2,300 suspected tax evaders.